Reinvention with Respect: An Interview with Jim Kelly of UPS

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Think you’ve got a big job? Imagine having 13 regional directors reporting to you. Those 13 have a total of 72 district managers reporting to them. And each of those 72 district managers runs an operation the size of a Fortune 1000 company. Now imagine that that’s just your core business, and you have several other business units to oversee—a couple of them with revenues in excess of $1 billion.

UPS, founded in 1907, has come a long way from its humble beginnings as a bicycle messenger service in Seattle, staffed by a handful of sturdy young men. Since then, the business has transformed itself many times to serve a changing marketplace. It has broadened its geographic territory, its offerings, and its mission.

But a decade ago, the changes started to come thick and fast, indeed. And that presented some challenges, says Kelly, because despite their history, UPS’s people did not see themselves as fast changing or flexible. UPS’s culture is legendarily focused on service, and its roots are firmly in the world of industrial engineering. The company’s traditional emphasis has been on replicating success and eliminating errors. A perfect example is its “340 methods” for drivers, which spell out, for example, how to carry one’s keys to avoid unnecessary fumbling and how many steps per second constitute the desired “brisk pace.”

As he prepared to usher in a new round of change—and in some ways the biggest change of UPS’s 90-plus years—Kelly knew he had two organizational challenges. One was to communicate the strategy clearly, down to the level of how it affected individual roles. The other was to give people the confidence to move boldly into new territory. In this interview, conducted in July by HBR senior editor Julia Kirby, Kelly describes how UPS’s people have come to “talk about ourselves differently”: as a company of innovators, undaunted by an uncertain world. It’s a fascinating accomplishment, especially for a man who is also known for maintaining a tight focus on operational excellence.

Kelly started his professional life as a UPS driver; he was a temporary hire to meet peak period demand during Christmastime of 1964. He ascended to the chairmanship in 1997. After 37 years with the company, he will retire in January—though, like all past chairmen, he will most likely continue to serve on the board. While Kelly modestly deflects questions about the personal legacy he will leave, incoming chairman Mike Eskew sums it up this way: “He has taught all of us the importance of keeping one eye on the horizon while the other stays focused on the steering wheel.”

What’s keeping people up at night at UPS these days? Besides overnight delivery, I mean.

Certainly, the economy is an issue right now, and meeting our growth expectations is something that keeps us busy on a day to day basis. Once you get to be a $30 billion company, you realize that if you’re going to grow 15% next year, you essentially need to create a $4.5 billion business from scratch. So we talk a lot about growth. By the way, 15% is not our goal—that was just illustrative.

We won’t hold you to it. But in the past five years, UPS’s net income grew at a compound annual rate of almost 22%. How can you possibly sustain anything like that? What’s your strategy?

The key is to keep our core business—package delivery—strong while developing new businesses. Continuing to grow that core business is very important to us, and we try to do that by understanding and anticipating our customers’ needs and putting products—a lot of which are information-based—in place to serve them. We’re working toward the day when the recipient of a package can get it whenever, wherever, and however he or she wants it. So for instance, if a package is moving from London to your office in New York, and you’re going to be in Chicago, you’ll be able to make a change on the fly and have it delivered there.

Globalization is also driving a great deal of our growth. Going forward, the rest of the world offers more growth opportunity than the United States because we have a long way to go to achieve the same density abroad that we have domestically.

For decades, we’ve been able to grow tremendously simply by expanding our core business geographically. Really, UPS’s first 75 years was spent expanding across the United States: first to 13 states, then to nine additional states, and so forth. We just took our core delivery business and applied for rights in different states. But eventually it became clear that we would have to develop new products and services if we were going to continue at that rate of growth.

How do you decide what new business lines make sense?

We know we need to reach far beyond our core business, but in ways that respect and complement it. A few years ago, we undertook an effort to rethink our mission and charter. Instead of seeing ourselves as just a package delivery business, we defined our purpose more broadly as enabling global commerce. It’s certainly true: We serve 8 million shippers and receivers a day and move about 6% of the U.S. GDP. But global commerce involves a lot more than moving goods; it’s just as much about moving information and money. So now we think in terms of all three of those flows as we create broader offerings for our customers and push deeper and deeper into their supply chains. The fastest growing part of UPS today is our logistics business, which involves our taking over logistics management activities from shippers. We also offer global financing services to new and expanding businesses through our UPS Capital business.

Revamping our mission clarified how our new undertakings fit with what we have done well in the past. Take consolidation, for example. One of the things Jim Casey, our founder, did in the early days of UPS was to convince retailers, all of whom had their own delivery trucks, to let us perform that function for them. This was a huge step at the time—the idea that your merchandise would be placed on a truck alongside your competitors’. Today, one of the elements in our logistics group is Service Parts Logistics; we keep a spare-parts inventory and make deliveries of critical parts as well as perform warranty repair services for companies like Lexmark and Dell. Because we can offer this service in an end-of-runway facility, with technicians working overnight, our clients can provide much faster service to their own customers. But again, it’s a question of convincing technology companies to place their inventories in the same facilities—staffed by the same people, using the same technology—as their competitors’. We face the same challenge Jim Casey did: to convince customers that a particular function is not central to their competitive advantage and can be better performed by us.

What’s hardest about leading UPS into new areas?

The sheer scale of the organization. We have over 360,000 people operating in 200 countries and territories, and one of our biggest challenges is simply getting them to understand our strategy. We have plenty of communications processes and an organization that is generally willing to respond, but there’s no getting around the fact that it takes time. People need a pretty good understanding of the company’s strategy, not just some superficial phrases, if they’re going to move together in the right direction.

They also need to be confident that they can succeed. And it certainly has not been a part of our nature at UPS to beat our chests talking about what a great company we are. Traditionally, we have focused on the good things maybe 5% of the time and spent the other 95% of the time focusing on what we had to do better. Meanwhile, our people were hearing analysts and the press describe us as a plodding and disciplined company: determined, yes—even relentless—but not inventive enough.

Wasn’t that true? Your rival, FedEx, seemed for awhile to be the real innovator in the industry.

The truth, really, is that we’ve reinvented ourselves many times. But that wasn’t a fact that our people reflected on. It’s something we’ve only recently started talking about. As we have wrestled with uncertainty in many areas of our business—technology investments, global competitors’ moves, and so on—it has been helpful to remind ourselves that uncertainty has existed in our history many, many, many times. I mentioned, for example, that we found success as a delivery consolidator for retail stores in the 1930s. Well, that business completely dried up with the advent of shopping malls after World War II, and we were compelled to create a new business. So we reinvented ourselves as a common-carrier wholesale business, competing with the postal service—something that had never been done before. We subsequently created an airline to provide next-day service, and we moved from serving three countries to serving 200—within a year, and by ourselves.

“The truth, really, is that we’ve reinvented ourselves many times. But that wasn’t a fact that our people reflected on.”

My point is that, in the last three to five years, we’ve begun talking about our history in this way to give ourselves a sense of “Yeah, it’s new and it’s different, and it’s tough and it’s a change—but that’s okay. We’ve done that successfully for many years.” The new UPS charter I mentioned was unveiled in 1998, and the value of innovation is prominent in it. We’ve built the same message into our external and internal communications. And as a result, we’ve given ourselves a little more confidence that we’re able to do what we have to do.

Sounds like your approach to reinventing UPS starts with reinventing its self-image—or even its mythology. Does that amount to reinventing the culture?

The UPS culture is what it is, and we’re very proud of it. It’s a culture where people are straightforward and honest, where integrity and loyalty and dedication are paramount. Let me give you an example. This past December 24, one of our drivers was delivering packages to a military base in Aberdeen, Maryland. It’s a busy day for us, as you can imagine. The address on one overnight packet was very incomplete, but rather than drop it at some base office to be routed to the recipient eventually, she took a lot of extra time trying to locate the soldier it was intended for. When she did, he was thrilled. It was a surprise gift of airline tickets to bring him home for Christmas—and the plane was leaving in two hours. Now here’s the funny part: He had just rented a stack of videos, thinking he’d be alone for the holiday. Who do you think he asked to return them?

That’s one of my favorite stories, but there are hundreds of examples like it. Our culture keeps us focused on taking care of customers and taking care of people, and we think it helps us run our business better.

When your culture causes people to engage in heroics on behalf of the company, you certainly don’t want to damage it. A lot of our routines—like training—allow the culture to perpetuate itself. We invest $300 million a year in training, much more than most companies do. We do weekly, monthly, and quarterly reviews of our policy book. These are all occasions for cultural values to be passed from one person to another—which is the only way they can be passed.

“When your culture causes people to engage in heroics on behalf of the company, you certainly don’t want to damage it.”

The key, though, to sustaining a culture is deciding what you don’t ever want to change and what you have to throw away—and when you have to do it. And I would say that there have been times when we’ve been too focused on details, when we’ve been reliable and dependable but not as innovative as we should have been. I think we’ve learned from that.

It’s interesting to me that you have this perspective on the culture. After all, you’ve never worked elsewhere. Do you think you’re a product of the culture? More broadly, does the place turn people into UPSers—or do people who already have those qualities simply self-select into it?

It’s probably a combination, but I think it’s more that it turns you into what you are. One of our chairmen, George Lamb, used to tell a story I liked a lot. He was at some business conference on ethics, and folks were talking about how their companies sometimes forced them to compromise their values—not to tell the customer the whole truth, or to cut corners here or there, or perhaps not report things as openly as they should. When George spoke up, he said his experience had been the opposite: that working at UPS had strengthened his values, made him more honest, and built his integrity. He would tell you that the culture influenced what he did and what he was more than he influenced the culture. And most of us who’ve been here for a while believe that. So yes, I think the place routinely creates a lot of folks like me.

Does that strong culture make it easier to build consensus?

We do tend to do that naturally. But consensus building isn’t our number one priority. We take the time to hear what each other has to say, but when people at UPS have to make a decision, they don’t procrastinate or hesitate, and they don’t take votes. Consensus is important, but consensus isn’t something we should ever let hamper us from being able to respond and react as quickly as we have to.

The reality is that, even if we disagree before the decision is made, we all come around, get on board, and work very hard to get it done. I mean, I can think of a hundred times we’ve had knockdown fights about what we were going to do and how we were going to do it—and I was on the wrong end of a lot of those arguments over the years. I thought, for instance, that the cost of supporting real-time package tracking would never be justified. But 99% of the time, when we came out of the room, we were all going in the same direction.

A History of Reinventions On its way to becoming a $30 billion global business, UPS has had to reinvent itself many times. But in the past decade, the transformations have come with much greater frequency—and as the company grows, the stakes keep getting higher. Keeping people from being unnerved by all the change, Jim Kelly believes, is a question of reminding them how many times the company’s been through it before.

Is that a function of how well and how long you’ve all known one another? Is there more trust built up in those relationships?

That’s part of it. I’ve known most of the members of the management committee for at least 20 years. I’ve worked with every one of them outside our corporate headquarters, whether in Canada or New Jersey or Connecticut or Illinois. So, yes, there’s a great deal of trust involved. But mainly, I think it comes from a strong sense of owner ship—the notion that this is our company, and we’ve collectively decided what we’re going to do. So the debate is over now, the decision is made, and I can either cry about it or I can go out and work hard to make it successful. The latter is really the only option.

You’ve recently done some more hiring from outside, as well as acquiring, of course. Do you think your legendary promotion-from-within policy has outlived its usefulness?

I used to worry that we restricted ourselves by focusing on promotion from within. I wondered whether we had as strong a management team as we might. But I think we do. After all, it’s not like we have a pool of ten people hanging around. We have a very large base of people, so you’re competing with a whole lot of people to get your first promotion, and then you’re competing with a whole lot of people to get your second promotion. And in fact, the more I’ve had the pleasure and opportunity to be outside UPS—and I’ve had more of that in the past several years—the more I’m convinced that we’re doing pretty well.

That’s not to say we won’t go outside when we don’t have the right skills or talent in-house. We’ve gone outside for thousands of people at a time—when we started an airline, for instance, and when we ramped up our information services function. Because we make them owners and spend the time to involve them personally in our strategy, they become UPS people readily enough, with just as much opportunity to progress. One reason I know this is true is that, during the height of the dot-com explosion, our turnover in IT was less than 10%. And that was mainly talent we had hired off the street.

But it’s still true that most of our people have little experience outside UPS. Is that good or bad? I don’t know. It’s worked so far.

There’s obviously a lot of loyalty in both directions—a rare thing today. Are other companies doing something wrong?

Well, I don’t know if I’m qualified to give other people advice on how to run their businesses, but the fact that there is so little long-term commitment anymore by people to the companies they work for does seem like a problem. And certainly, that’s been caused by companies not having demonstrated a long-term commitment to the folks who work for them. As a society, we’re not better off as a result of it. UPS tries to be a loyal employer—we’ve never had a layoff, for example. In general, I think more loyalty should exist in employers toward their employees—and vice versa.

Given that emphasis on loyalty, the drivers’ strike in August of 1997 must have been a real psychic blow, not to mention a financial one. According to reports, it cost UPS more than $600 million.

That was a terrible time for us. We had never had a national strike before, and for some of our people, it was like the end of the world—and not just because we weren’t serving customers for a couple weeks, which was damaging enough. We were also stung by negative press coverage and the perceptions of us being created by some people who didn’t understand the real issues at stake. We had drivers and supervisors mad at each other—a lot of things contributing to a feeling of uncertainty and uneasiness about our future.

But I have to say that the aftermath of the strike stands as the proudest moment of my career. People worked so hard to reestablish the trust of customers that we had let down for 15 days, to rebuild the business, and to grow the business. What they did was almost miraculous: By our next peak season, only four months later, our service levels had not only returned, they were the highest they’d ever been. Believe me, there were a lot of people who thought the strike would have a crippling effect on us for a long, long time. And they were proved wrong. Being part of that was extremely satisfying and a lot of fun.

In so many companies, as CEOs turn over with every flop of the stock price, it seems like the primary task of a new boss is to make an old boss look bad. But at UPS, past leaders are clearly remembered and respected.

People here do have a sense of what the various chairmen have been concerned with and what was accomplished during their tenure. There are plenty of stories about Jim Casey, of course, and the other leaders of what I would term our founding era: George Smith and Harold and Paul Oberkotter. They really established the culture. I’ve mentioned George Lamb. More recently, Jack Rogers was what we call an “operator”—someone who paid close attention to the details of the operation. But he also was the one who insisted we start an airline and compete in the next-day air business, which was a huge and controversial investment at the time. My immediate predecessor, Oz Nelson, was really a customer service person who helped us all remember how important that is. And he drove some important technology, marketing, and product innovations. They all had unique strengths that were needed at the moment, as well as having the UPS qualities that we all admire. We’ve been fortunate to have the right people at the right time.

So what is it that you’ll be remembered for most?

I don’t think about that type of thing. It intimidates me too much.

Perhaps as the one who took UPS public?

Maybe, but in truth that’s a decision I agonized over. I don’t tend to lie awake nights, but I had a difficult time with that one. A lot of us did. In fact, a year before it happened, I said we would never go public. I’ve learned not to say never.

There were good reasons, of course, for us to do the public offering—the main one being to create a currency that was valued in the same fashion as companies we were talking about merging with or acquiring. Expanding our global footprint will likely include making some sizeable acquisitions—for instance, we just acquired the Fritz Companies to augment our supply chain business—and many times those are best done through stock transactions. But if the market is setting one party’s stock price and not the other’s, it complicates things. When you’re talking to someone and you know the value of your business is twice theirs, but their currency is valued at twice yours, you just can’t do a great deal.

But we worried about the impact an IPO would have on our people. We’ve always said that the strongest and most important thing about our company is that we’re owned by our managers and managed by our owners. So we wondered: Would that same feeling of ownership continue to exist after doing a public offering? As it happens, our managers did not hold 100% of our shares anyway. About one-third were held by heirs of founders and foundations. So active owners and retirees really had two-thirds of the stock, and we anticipated that the proportion would stay the same post—IPO. But we’ve always believed that people having a feeling of ownership really translated into harder work and greater loyalty and more enthusiasm. That’s worked very well for us for a lot of years. And I’ll tell you what I don’t want to be known for in UPS history books. I don’t want them to read: “…and he’s the one that screwed it all up.”

Are you concerned about a shift toward short-term thinking as people begin to focus more on the stock price?

We think our share owners should get treated well and should get a fair return, but we’re not as concerned with whether they’re going to get a fair return tomorrow or a year from now or five years from now. We’ve always thought that the long term was the important thing. If we were to start dancing for the folks on Wall Street because they expect something in the quarter, it would be counterproductive.

Your people should be focused on doing the right things to grow your business and keep your costs in line, but their actions may or may not translate into a different stock price today. If you see a red number after you’ve worked your tail off all week, does that mean you’ve done something wrong? Or if you see a green number after you’ve spent the last two days playing golf? In my mind, it just doesn’t relate.

You’ve overseen a reinvention of UPS, launching it into new businesses that are taking it—to use a tired phrase—from the old economy to the new one. But I haven’t heard you take credit for any of it.

I’ll be honest. I think CEOs are terribly overrated. The whole concept of the superstar CEO is nuts. When you look at successful companies, there are a whole lot of folks doing a whole lot of things to make them successful. Being a “superstar” has an awful lot to do with timing.

“Around here, we don’t think of ourselves as individuals doing too much on our own. We think of ourselves as people working together to get things accomplished.”

So yes, those things are occurring now while I’m fortunate enough to have this job. But around here, we don’t think of ourselves as individuals doing too much on our own. We think of ourselves as people working together to get things accomplished. And that’s what we will continue to do.

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